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Is the Sale of Its Chinese Assets Good for Anadarko?

Anadarko’s decision to sell its Chinese oil and gas assets further improves its flexibility in dealing with the Tronox bankruptcy case.

Arjun is a value-oriented investor focusing primarily on the oil and gas sector, with an emphasis on E&Ps and integrated majors. He also occasionally writes about the US housing market and China’s economy.

Last week, Anadarko(NYSE:APC)announced the sale of its Chinese subsidiary to Hong Kong-listed BrightoilPetroleum Holdings Ltd. for $1.075 billion. The deal is the latest effort by the Woodlands, Texas-based oil and gas producer to rebalance its portfolio and concentrate on more profitable opportunities in the US and the Gulf of Mexico. Let's take a closer look at some of the main reasons why the deal is good for the company and its shareholders.

Source: Anadarko Petroleum Corporation

Solid transaction metrics In my view, the sale is a net positive for Anadarko any way you look at it. Firstly, the metrics of the transaction look solid. According to an analysis by Citigroup, the transaction price values the assets at a 4.0x EBITDA multiple and at about $100,000 per flowing barrel. This compares quite favorably even with recent transactions in world-class plays such as Texas' Eagle Ford shale.

For instance, Devon Energy(NYSE:DVN) paid roughly $113,000 per flowing barrel when it acquired Eagle Ford acreage from GeoSouthern Energy back in November. Though Devon paid a hefty price for the assets, the move should pay off in spades since the acreage will be immediately self-funding and is expected to generate some $800 million in annual free cash flow.

Second, Apache's Chinese assets are non-operated legacy assets whose loss won't have a substantial impact on the company's production. They're located in the Bohai Bay field, a massive oil and gas production base offshore China, and are operated by state-owned China National Offshore Oil Corporation (CNOOC)(NYSE:CEO). Last year, Anadarko's net oil sales volumes from the field averaged only 11,000 barrels per day, representing less than 1.5% of the company's total production in 2013.

Improved financial flexibility Third, and more importantly, the sale gives Anadarko even more financial flexibility at a time when the company faces considerable uncertainty regarding a legal ruling. In December, U.S. Bankruptcy Judge Allan Gropper held Anadarko liable for environmental pollution caused by Tronox, a chemical company spun off from its Kerr-McGee unit in 2005. Though the final payment is yet to be determined, the judge indicated that the penalty could range from $5 billion to $14 billion.

Though Anadarko is already well capitalized with substantial liquidity to deal with a penalty in the lower end of that range, the sale of its Chinese assets will help further shore up its balance sheet. As of the end of the fourth-quarter, the company had more than $7 billion cash on hand. Once the proceeds from the sale to Brightoil come in, it will have more than $8 billion to defend against the ultimate payment.

Even if the final penalty ends up being in the upper end of the range indicated by Judge Gropper, Anadarko still has more assets that it can sell to raise additional cash. According to a statement made by CFO Bob Gwin, the company was actively marketing its offshore Brazil oil and gas assets last year. The sale of these offshore assets could potentially raise as much as $5 billion.

Focus on more profitable domestic assets Last but not least, the decision to sell its Chinese assets is consistent with the company's strategy of divesting non-core assets in order to focus on higher-return opportunities in Colorado's Wattenberg field, Texas' Eagle Ford shale, and the Gulf of Mexico. Other recent asset disposals include the sale of its 10% interest in a gas field offshore Mozambique for $2.64 billion and the sale of its three Indonesian units to PT Pertamina, Indonesia's state-owned oil and gas company.

In recent years, this strategy of selling foreign assets to focus on domestic ones has become increasingly popular among US-based energy producers. ConocoPhillips(NYSE:COP), for instance, has unloaded assets in Kazakhstan, Algeria and Nigeria as it seeks to exploit more profitable opportunities in the Bakken, Eagle Ford, and Permian Basin, while Occidental Petroleum(NYSE:OXY) has put up for sale a minority stake in its Middle East business as it zeroes in on the Permian basin, its most profitable asset.

The bottom line All told, the sale of Anadarko's Chinese assets should reassure shareholders that the company can cushion a potential blow from the ongoing Tronox bankruptcy case. With a strong balance sheet and plenty of options to raise additional cash, I think Anadarko is well positioned to defend against potential penalties related to the case, which could end up being a lot lower than the markets expect given the company's strong defense.